Prepayment Penalties

A note to our clients:

As much as we here at Oceanvale Mortgage and Finance wish we could change the current guidelines for prepayment penalties charged to our clients for an early exit from a mortgage, it looks like we are stuck with them for now.

As most of us know, once you sign a contract it can be tough to get out, as long as it is a legal one, and breaking contracts usually come with steep costs and fees. Recently, the way that lenders protect themselves through penalties for exiting a contract early has become under attack from disgruntled borrowers.

It was considered unfair that the lenders could pick and choose which penalty to apply when a borrower breaks a mortgage contract. Whether it is a three-month interest penalty or the interest rate differential (IRD) charged to the borrower, the lender uses the highest penalty and applies it. Another point, that was under scrutiny, was the dollar amount that the lender charged for a penalty was not taking into account inflation; the money paid now is not of the same value of the future periodic payments, it would have more buying power than the dollars to be spent in the future.

These were the main issues, among others, that a borrower had attempted to start a class action law suit against one of the big lending banks. Unfortunately for the borrower, The British Columbia Court of Appeal dismantled the law suit on the grounds that:

* The ability to have discretion of which metrics to use when calculating early payment charges is the lender’s right, as long as it is clearly stated in the contract and clearly defines the process of evaluation.

* The fact that inflation is not being taking in to account does not apply due to that these prepayment penalties are just that, penalties, and not compensation. The cost of breaking the mortgage contract is the borrowers privilege, not an evening of the “scores.” It would be a different outcome if the lender was looking to be compensated for an exact value of what they are forgoing from a prepaid contract.

And so, as it still stands, we need to really make sure we are prepared and deeply consider the possible costs and penalties of the current mortgages we are in, or that we may end up in, because though we, as borrowers, may not feel as if it is a fair outcome, lenders retain the power to determine the amount of the prepayment penalties. They have taking great care and due diligence in making the mortgage contract legally binding and in that process the borrower has every detail within the contract which provides the necessary information to properly weigh the benefits and drawbacks of future financial decisions. Here at Oceanvale Mortgage and Finance, we will make sure that as our clients we break down the stipulations of the mortgage contract, which vary from lender to lender, so that you are fully aware of all the possible penalties, fees, benefits, and advantages of the contract. We can help in choosing the right mortgage product personalized for you to work with your future plans, not against them, providing the necessary flexibility and freedom you need. Come talk to us and see what we can offer you, we promise not to disappoint.

Big thank you and take care from the team here at Oceanvale Mortgage and Finance!

Jose MuroMortgage, prepayment